Ockham Reseach - the Razor's Edge

Boeing Cleared for Take-Off

The Boeing Company ( BA) has been making headlines for the wrong reasons lately. First, came word of unspecified delays in rollout of the new-generation 787 “Dreamliner”. BA has notified two early 787 customers–British Airways and

Virgin Atlantic–that the preliminary delivery date of early 2009 looks unlikely, as the manufacturer must redesign the area where the wing meets the fuselage. Furthermore, Boeing was stunned to lose its bid to replace the U.S. Air Force’s (USAF) in-flight tanker fleet to its European rival.

The $35 billion contract for the USAF tankers–which many considered an almost certainty for Boeing to win–was also highly politicized. Boeing management raised national security questions about the USAF awarding large contracts to a foreign company, particularly during a domestic economic slowdown. “Our team has taken a very close look at the tanker decision and found serious flaws in the process that we believe warrant appeal,” said Jim McNerney, Boeing’s Chairman, CEO and President. “This (appeal) is an extraordinary step rarely taken by our company, and one we take very seriously.”

Clearly the $35 billion dollar project would have been a nice addition to Boeing’s sales, but even without that deal the fundamentals underlying BA look fairly attractive. Consensus analyst estimates still predict 12.5% sales growth in 2009. Estimates also show a rise in EPS in the neighborhood of 20% to $7.14 per share from $5.97, which continues the strong earnings growth that Boeing has enjoyed since 2003. Boeing has increased its dividend each of the last five years as well, which is a good sign of management’s confidence in the company’s financial strength. Perhaps the most telling aspect of the recent success of the company’s management is its ability to consistently grow Return on Equity (ROE). ROE was a bit below average 5 years ago at just 9% but has steadily grown and to 44% last year.

So, combine a few negative news stories about BA with a generally weak market so far in 2008 and it is easy to understand how the stock is off more than 12%. Were it not for the underlying strength of Boeing, the stock’s swoon could have been much worse. There are stocks that are more undervalued than BA in the market, but it is a purchase candidate for investors with a 3-5 year time frame, when Ockham’s valuation methodology has a rational price target for Boeing in the range of $90-$93 a share.

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